theOAP

As I've said before in previous posts, I disagree with nun on the fairness of WEP.

That worries me.

I usually agree with nun on most topics, and have a great deal of respect for his opinions (and his tireless willingness to help others). I enjoy a healthy debate. When it's with someone with a level of knowledge (as displayed by nun) which you highly appreciate, it requires a bit of reflection as to the basis of your own opinions. Over the many posts on the subject of taxes and WEP, I've come to identify (in my opinion) why the occasional difference of viewpoints.

It has to do with perspectives (US-centric vs. UK-centric, and sufficient retirement income vs. lower retirement income). I've never seen such a discussion before. It perhaps might be the basis for an all new thread. But since one of the issues is WEP, I'll start on this thread.

First, tax. This is where a US-centric vs. UK-centric perspective on retirement comes into play. We talk about the same forms, treaty, instructions, lack of instructions, etc., but where ones major percentage of retirement income is sourced (US or UK) leads to a different perspective. Enough on that, and on to WEP.

WEP calls into play a sufficient amount of retirement income for some vs. those with a much smaller amount of retirement income. WEP is very much a 'one size fits all' solution (or problem, depending on your perspective). For those with higher retirement income levels (say £60,000/year) the amount of WEP applied (50% of $791 max., as pointed out by Basher) is of little damage in reality. The annoyance is the wisdom as to whether it should be applied to foreign pensions or not.

For those on smaller pensions, the amount WEPed does become significant. The following is an example:

A 'US Person', retired and living in the UK, paying UK tax on the arising basis has the following income: $3,875 in US SS (pre WEP), $2,500 in US company pension, £3,500 in UK State pension, £2,500 in UK company pension, and £800 interest from a UK cash ISA. After a rough fag packet calculation, you arrive at the following figures given certain conditions***: They owe £11 ($17) to HMRC for the year. They owe £109 ($164) to the IRS for the year. They lose £250 ($375) a year to WEP.

£250 is not a great sum, but for someone on a retirement income of £10,799/year (the example above), it would be a nice addition. For someone on a retirement income of £60,000/year a WEP of £264 (the maximum) is an annoyance only. I disagree with WEP on a basis of the wisdom of its applicability to foreign pensions. I also very much disagree with WEP due to its 'unfairness' to those on lower incomes.

***Given Conditions: US exemption and Std. deduction (for over 65) for TY 2012, UK personal allowance for TY 2013/14, UK self assessment with 90% of foreign pension income taxable, and use of US/UK treaty SS agreement. Exchange rate of 1.50 to 1.

nun

OAP, you make me blush and the sentiments are mutual.

WEP certainly has many problems, but there is a move to have it repealed and I think it's getting some bipartisan support in Congress.

http://www.massretirees.com/article/...epgpo-underway

My support of the principle of WEP stems from the way SS is currently set up and calculated, ie that SSA would derive an erroneously low average wage for people with less than full SS records and with non-SS pensions. As SS is somewhat progressive that would lead to a larger SS check than would be appropriate for their salary and number of year's of contributions. It isn't perfect and was never intended to cover expatriates so I can see there might be some anomolies, but IMHO it works well for state workers who don't contribute to SS.......and I'm one of those state workers who will be WEPed. I am looking at this from a US-centric low wage perspective as there are many US workers who should get the relatively larger SS check resulting from a low average lifetime salary. The fact that I'm fairly well paid, but only have 17 years of SS payments shouldn't get me an inflated SS calculated with an incorrectly low average lifertime salary.

Personally I like the new UK system far more for it's simplicity and provision of a benefit dependent on number of years of credits and not salary. This is a big benefit to those on lower wages, but is obvioulsy not a good deal for those on higher salaries as they are paying more for the same benefit....but some wealth redistribution is a good thing if it can held reduce poverty in retirement.

Giantaxe

Great question. Also, if you defer beyond your "retirement age" and are still working here, can you go on making voluntary contributions? Not that I want to be in this position, but it would be nice to know the options.

nun

If you defer your state pesnion past your normal retirement age your weekly payment will increase.....and it's a pretty nice increase too.

https://www.gov.uk/deferring-state-p...at-you-may-get

So if you have other retirement savings to fund you past 65 or 66 etc you can live off those and increase your annual guaranteed life time income from the state pension. Its a nice way to insure against the risk of running out of money if you don't turn your pension pot into an annuity......which seem to be terrible value for money in the UK from the research I've done.

Giantaxe

It does seem a good option. Your state pension increases by 10.4% (1% for every 5 weeks of deferral) per year of deferral. The pdf linked in your link also answers my other question,namely "you do not pay any National Insurance when you are over State Pension age."

nun

Yes it's a good deal. You can do a similar thing with US SS as well. My plan is to defer both US SS and UK stae pension until 70 and live of my savings. Deferring is like buying an annuity with a really good interest rate and it maximizes your guaranteed income in latter life. This is a common strategy in the US were people can adjust their annual income from their retirement accounts like IRAs and 401ks because not many people buy annuities. In the UK people tent to use their pension savings to buy an annuity and so don't have the flexibility to concentrate income earlier in their retirement

Giantaxe

I am planning to defer my US SS and it's good to hear that you can do the same with the UK pension. The yearly increase in the US is a little less generous at 8%.

I wonder why there's a difference in buying annuities between the US and UK? Maybe because UK annuities used to be financially generous? Maybe a cultural difference? I know that in The Netherlands, you are legally required to buy an annuity with your retirement savings.

Giantaxe

I'll be amazed if the WEP goes away as it'll be next to impossible to get Congress to agree on offsetting cuts to match the cost of its removal.

nun

I think the difference between the US and the UK is mostly cultural. Also the UK financial industry isn't as developed for DIY investors. The US has had defined contribution retirement plans for longer than the UK and the mutual fund industry is bigger and more oriented to the DIY invetsor. Companies like Vanguard, Fidelity and discount brokers make it easy and most importantly inexpensive to manage investments. The UK is just not as sophisticated or cheap. I think of most UK invetsors as sheep who get taken advantage of by the high fees and poor products available in the UK. Actually that's true for the US too, but maybe not to the same extent.

Annuities have always been part of the landscape of US retirement investing, but for a long time they were out of favour because financial advisors were pushing the potentially larger returns and flexibility that could be had from an equity and bond portfolio, but that obvioulsy has it's limitations and dangers when you need income as shown by the 2008 crash. In the UK the emphasis seems to be on equities while you are working and then going for an annuity to guarantee lifetime income. I have nothing against that, I have a defered fixed annuity myself, as long as the annuity is a good one. Unfortunately the annuities I see in the UK give terrible returns and have high fees.

theOAP

I awoke in the middle of the night with a realization that I'd made a hugh mistake in post #136! Funny how the brain works. In my haste to get outside yesterday (it was a glorious day here), I put the wrong figures in the post. I dug through the bin (yes, it really was calcs on the back of a fag packet), and found the error.

Calculating WEP can be confusing, so I thought I'd better correct my error in case some poor soul was trying to calculate WEP using my example as given in the post.

I forgot to finish off with the golden 'never more than 50%' rule.

The above is rubbish. The person in the example actually loses £1,291/year to WEP, which is the significant amount.

My apologies if it caused anyone confusion.

dunroving

When I read that post I thought you were losing your marbles. Now I know you are.

theOAP

What do you mean 'losing'? I think 'have lost' is more appropriate.

I feel a right plonker.

Mummy in the foothills

Also if they are living in UK they would have to earn over $90000 a year or some such figure to pay the US any income tax.

Dh plans on taking SS at 62 then his union pension at 65 and if he has anything in UK pension that will be at 67 (not sure of those rules is it based on me paying in 30? He will have over 10 years of his own, just).
I'll probably do the same SS at 62 (no union for me till he kicks the bucket) and UK pension at 65.

nun

The ~ $90k you mention only applies to earned income, not pensions or investment income. If you have investment income in the US there will be US tax due as the treaty specifies a minimum tax on US dividends and capital gains. The pension and SS income is a bit more complicated, but any US tax due is usually covered by foreign tax credits for the UK tax paid.

If you can manage it deferring both US SS and UK state pensions is a great deal. Your SS payment goes up by 8% a year and your UK state pension increases by 10% each year. That's a great return from what is in effect an annuity.

Mummy in the foothills

So we'd not pay on earned income (earning to little) but will owe tax in both countries on retirement income? I thought I had it semi figured out, I guess not!